Largest pension funds in Netherlands facing rights cuts next year

Four of the Netherlands’s five largest pension funds have conceded they are facing rights cuts next year if their funding at year-end fails to improve relative to the end of February.

Over the last month, civil service scheme ABP, healthcare pension fund PFZW and metal schemes PMT and PME saw their coverage ratios fall below the critical level.

Whether they will be required to cut pension rights, however, remains uncertain, as funding has increased by 3-4 percentage points on average in the meantime, according to Mercer.

Dennis van Ek, an actuary at the consultancy, pointed out that the MSCI World Index had improved by 4 percentage points over the past two weeks, while the 30-year swap rate – Dutch schemes’ main criterion for discounting liabilities – increased from 1% to 1.2%.

The €357bn ABP reported a 3-percentage-point drop in its current funding to 88.2% at the end of February, whereas the trigger level for rights discounts stands at 90%.

A coverage of 88.2% at year-end would entail a 1.8% rights cut for its 2.8m participants and pensioners.

The discount, however, could be spread out over a 10-year period.

PFZW’s coverage at February-end came out at 87% – its trigger level – following a decrease of 3 percentage points.

Van Ek pointed out that the trigger level depends largely on the scale of a pension fund’s securities allocation and can range between 85% and 100%.

“The larger the allocation combined with a cost-covering contribution, the lower the critical funding is, as the better return prospects for securities weigh heavier than their risks.”

According to the actuary, the trigger level for most large schemes is approximately 90%.

PMT closed February with a funding of 89.6% after a drop of 2.6 percentage points.

Since the start of the financial crisis, the €62bn metal scheme has had to reduce pension rights a couple of times.

The same goes for its €41bn sister scheme PME, which saw its coverage fall by 2.2 percentage points to 89.2% last month.

With a funding of 102.4% as of the end of February, BpfBOUW, the €48bn scheme for the building sector, is the only large pension fund in the Netherlands managing to avoid the danger zone.